Veterans have limited closing costs they are allowed to pay, per the VA. Any costs beyond what the VA allows them to pay is left up to the seller, realtor, or the lender themselves. If the seller decides to pony up and pay the closing costs, is there a maximum amount they can pay?
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Like any loan, the VA does cap the seller’s financial assistance when buying a home. Otherwise, they could consider it an inducement to purchase. In other words, the seller ‘bribed’ the buyer to buy the home. When the seller only contributes a reasonable and customary amount, though, that claim won’t ring true.
So what can the seller pay?
All Reasonable and Customer Closing Costs
The VA doesn’t have a specific amount that the seller can pay towards a buyer’s closing costs. In other words, the seller can pay all of the veteran’s closing costs. Typically, closing costs are between 3% and 5% of the loan amount. With a VA loan, they might be towards the lower end, just because the VA limits what lenders can charge borrowers.
Unlike other loans, though, the VA allows sellers to pay 100% of the closing costs. The only stipulation is that the closing costs are reasonable and customary for the area. In other words, the VA won’t let the seller pay excessive fees.
Concessions are Different Than Closing Costs
It gets even better. The VA also allows sellers to provide seller concessions. These are like ‘gifts’ the seller offers when you buy the home.
They are basically costs that aren’t a part of the standard closing costs that the seller is willing to cover. A few examples of what the seller can cover include:
- VA funding fee
- Prepaid interest
- Real estate taxes
- Homeowner’s insurance
- Judgments you owe
- A seller credit for a home repair
Any money the seller is willing to concede at the closing is a seller concession. In order to avoid the ‘inducement to purchase’ accusation, the seller cannot contribute more than 4% of the sales price of the home in concessions.
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Why Sellers Pay the Closing Costs or Offer Concessions
You might wonder why a seller would even consider paying your closing costs or giving you 4% seller concessions. It all comes down to the marketability of the home. which home would you rather see first – the one that the seller is offering help with closing costs or the one that the seller isn’t offering any help?
It’s a no-brainer. Buyers will flock to the home where they know the seller is offering help. This is especially important in today’s economy when first-time homebuyers are having a hard time coming up with the money for a down payment and/or closing costs.
In the end, sellers still walk away with the same profit, or at least close to it. They just have to make sure the home is worth enough for them to pay the closing costs. Let’s say the home is worth $400,000, the VA will allow financing up to that $400,000 mark. If a buyer wants help with the closing costs, they may be willing to offer that higher price for the home in exchange for help with the closing costs. If a buyer is using their own money for closing costs, they may be a little stingier with their bid on the home.
Negotiating With the Seller
It’s important to know that the negotiations for seller paid closing costs or seller concessions must be done during the contract negotiations. Everything must be in writing in the contract in order for the lender to allow it to happen.
You can’t just decide two days before the closing that you can’t afford the closing costs and ask the seller to pay them. Instead, you must have it in writing and give the lender enough time to evaluate the situation to make sure it all works. Plus, you need to give the seller time to make sure he/she is getting the net value they wanted for the home even after paying your closing costs.
Sellers can be a valuable resource when buying a home with a VA loan. The VA allows more help than many other loan programs. Just make sure you cover all aspects of the loan and assistance you’ll receive with the lender ahead of time to ensure that it all works out in the end.